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Testing for Third-Order Stochastic Dominance with Diversification Possibilities

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  • Post, G.T.

Abstract

We derive an empirical test for third-order stochastic dominance that allows for diversification between choice alternatives. The test can be computed using straightforward linear programming. Bootstrapping techniques and asymptotic distribution theory can approximate the sampling properties of the test results and allow for statistical inference. Our approach is illustrated using real-life US stock market data.

Suggested Citation

  • Post, G.T., 2002. "Testing for Third-Order Stochastic Dominance with Diversification Possibilities," ERIM Report Series Research in Management ERS-2002-02-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    • Handle: RePEc:ems:eureri:164
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    efficiency; linear programming; portfolio evaluation; portfolio selection; stochastic dominance;
    All these keywords.

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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